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Marketplace Morning Report

Legal pot sales could top $10 billion by 2018

Mitchell Hartman Jan 7, 2015
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Roughly half of U.S. states now permit medical marijuana use with a prescription. In Colorado, Washington, Oregon and Alaska, buying marijuana for recreational use has been legalized as well. By 2017, legalization advocates predict another dozen states could follow suit  including the biggest prize for marijuana businesses  California.

Revenues from marijuana production and sales in the U.S. states where it is legal could top $10 billion dollars by 2018 (up from $2.6 billion in 2014), according to research by the ArcView Group, which promotes investment in the emerging cannabis industry.

The business holds high potential for reward – and risk – for anyone thinking of taking the plunge. This was evident at a pair of major cannabis conventions last November in Las Vegas – an investor “pitch-a-thon” put on by ArcView and the Marijuana Business Conference and Expo, hosted by the publication Marijuana Business Daily.

Among the several thousand who attended: Filmmaker and talk-show host Ricki Lake, working on a documentary called “Weed the People,” about the potential benefits of cannabis as a cancer treatment; and bootstrapping entrepreneurs such as Jill St. Thomas of Colorado, purveying her “Mad Hatter” line of cannabis-infused coffees, teas and “mocktails,” and Gracen Hook of Washington, trolling for investors for what he called the first pot-themed resort with a “five-star restaurant, a spa conducive to cannabis tourism and a 40-room hotel.”

Tripp Keber, CEO of Denver-based Dixie Elixirs & Edibles, one of the fastest-growing cannabis companies nationwide, was offering pot-infused soft-drinks, candy and fudge. “If you look at Colorado alone, this year it’s forecast to exceed $700 million – that’s massive expansion,” Keber says.

The federal government remains an obstacle to people trying to build regional or national marijuana businesses. 

Marijuana is still classified as a Schedule 1 drug by the federal Controlled Substances Act, which puts cannabis in the same class of illegal drugs as heroin. And federal tax and banking rules make routine business activities – like paying the rent or sending product-samples through the mail – a nightmare of financial risk.

Bruce Granger helped found a state-of-the-art marijuana production and retail company in Denver called Kind Love. The company’s new facility in a Denver warehouse district is brimming with the latest agricultural technology and climate control systems, not to mention plenty of security.

And Kind Love has plenty of customers. But, says Granger: “Banks are nervous to take our money.” Federal money-laundering rules don’t allow banks that are FDIC-insured to handle proceeds from illegal drug-sales, he explains. “Think about running a business and not being able to use a bank account,” he says. “How do you do accounting? Most people don’t have a bank statement. So it’s all cash.”

Brooke Gehring runs Live Green Cannabis, a chain of medical and recreational pot-stores in Colorado that do tens of thousands of dollars in sales every day. Managers carry that cash around – in their cars and briefcases – to deliver the payroll. “They have one of our armed security officers with them, to collect and sign off for payment in cash,” Gehring says. Previously, she was a bank compliance officer, so she is aware of how closely banks are scrutinized. “As much as banks like fees, they’re not going to risk their insurance or their reputations to bank this industry that still remains federally illegal,” she says.

States predicted as likely to legalize recreational marijuana use for adults 21 or older, or medical marijuana. As predicted, voters in Oregon, Alaska and the District of Columbia approved recreational-marijuana legalization in November 2014. Voters in Colorado and Washington State voted to legalize recreational marijuana production, distribution and retail sale in 2012.

To complicate the business further, the IRS tax code doesn’t allow businesses selling federally illegal drugs (including those legal under state law) to deduct most business expenses from their tax bill. So they’re taxed not just on profits, but on all revenue.

Oregon Democratic Congressman Earl Blumenauer has introduced legislation to do away with what he calls these “punishing” federal rules for state-legal cannabis businesses.

“If you care about money laundering or tax evasion or just theft, forcing legitimate businesses to pay their taxes with shopping bags full of $20 bills is insane,” Blumenauer said in an interview at the ArcView investor conference. “Let these legitimate businesses have fair taxes and banking services. They’ll be better off, but so will society.”

Blumenauer predicts that the reform bills he supports – HR 2240, the Small Business Tax Equity Act, and HR 2652, the Marijuana Businesses Access to Banking Act – will receive bipartisan support, even in this deeply divided Congress.

Many lawmakers on both sides of the aisle in Washington oppose marijuana legalization. But key conservatives, such as California Republican Congressman Dana Rohrabacher and anti-tax activist Grover Norquist of Americans for Tax Reform, are working in with Blumenauer and fellow liberals on this issue.

These lawmakers and advocates say they want to give the emerging cannabis industry room to grow and experiment – on the right side of the law.

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